BOMBAY, 9 September — Why do investors buy stocks? The obvious answer is to make money. But apart from that, stocks have more fancy in India rather than mutual funds as investors feel that the stock is listed on the exchanges and that visibility gives them the security. But now this security, so seeing the stocks listed and traded on the bourses is under major threat as more and more companies are going in for delisting their stocks via the open offer route.

Over the past few months, there has been a virtual deluge of the number of open offers which have swamped the markets. In the last five years on account of acquisitions, Securities and Exchange Board of India (SEBI) figures reveal that there have been as many as 1,500 takeovers between April 1997 and March 2002. Of these, there were 339 open offers which ended up in a total booty of Rs.70.35 billion for shareholders.

The ball was set rolling by bigwigs like Cadbury India, Philips India, Reckitt Benckiser and Carrier Aircon. Infact it has been noticed that over the past 16 months, there were 20 multinationals (MNCs) which opted for the open offer route, thereby getting 100 percent ownership of their subsidiaries and thus delisting their shares from the Indian bourses. Cadbury India and Reckitt Benckiser opted for a 100 percent buyout of shares from the Indian public.

This trend of getting the stock delisted is not a very welcome sign. With delisting, investors are denied an opportunity not only to invest and participate in the future growth of the company but the industry as well, if the industry is short of other credible players. Moreover, with each successive delisiting, investors are deprived of quality stocks for investment in that industry.

Also, despite the unattractive pricing, the threat of delisting compels shareholders to tender the shares and this is most certainly not in favor of the shareholders.

For instance, Cadbury India is one of the prominent players in the confectionery industry and to that extent investor participation in the industry would stand eroded.

Infact there is news that Zydus Cadila’s ambitious plan to get its subsidiary, German Remedies, de-listed has run into rough weather for now. Its open offer for acquiring GRL’s remaining 44.60 percent shareholding at a price of Rs.300 per share has met with a rather lukewarm response. According to market sources, the company has been able to garner around 20 percent shareholding from the open offer which closed on July 6, raising its total equity stake from 55. percent to around 75 percent.

One major Indian company to make an open offer has been the Aditya Birla group flagship — Hindalco Industries. It made an open offer to buy the 25.5 percent of equity it does not already own in subsidiary Indian Aluminum at Rs.120 per share. The open offer will remain open between Sept. 5 and Oct. 4. If Hindalco’s stake in Indian Aluminum (Indal) exceeds 90 percent after the open offer, it will make another open offer to buy the remaining shares from the public, before applying for delisting.

There have been other prominent open offers like the one from Eastman Kodak Company and Kodak UK which made an open offer to public shareholders of Kodak India to acquire up to 25.24 percent of the company’s equity at a price of Rs.350 per share. Then there is British firm J&P Coats which has also made an open offer to shareholders of Madura Coats for a 36.8 percent stake at Rs.40 a share.

The market regulator, Securities and Exchange Board of India (SEBI) is looking into the issue. SEBI has now drafted new regulations for delisting which are awaiting notification. And in this, a company will be allowed to delist only after it has been listed for three years. SEBI has stated that delisting cannot be avoided as it is a business decision. But what can be assured is that shareholders get a fair valuation from the acquirer. Moreover, the draft suggests, companies will not be allowed to use the buyback provision to delist the company.

If this trend of getting delisted is not curbed soon, many more investors will continue to lose and there will be further erosion of sound investment options in the equity market.